Gold's 50-DMA Breakout

In yesterday's alert, we wrote that the decline in the USD Index was likely
a temporary phenomenon based on the investor's needless overreaction - the
USD reversed and more than erased this week's decline. The metals' reaction
was also in tune with our expectations - they reversed. Was this just a one-day
phenomenon and will gold rally based on its recent breakout above its 50-day
moving average or can we expect more declines in the following days?

The latter scenario seems much more probable. We've seen gold hit a strong
resistance level (a combination of such levels), a support in the USD Index,
reversals in the latter and in silver around their turning points, underperformance
of mining stocks relative to gold and very short-term outperformance of silver.
Additionally, we saw bearish confirmations from a few ratios and gold's reaction
to the USD's declines was temporarily weakened. All the above happened as precious
metals were making headlines and among increased interest in the sector. That's
a very bearish combination - the outlook is more bearish than it was in the
past days and thus we are now increasing the size of the speculative short
position.

Let's take a look at the charts (charts courtesy of http://stockcharts.com)
for details.

The USD Index moved even lower yesterday, but gold didn't move higher
than it was when we wrote the above (about $1,217). In other words, gold
didn't respond to an additional decline. This suggests that even if the
USD Index drops further, gold may not rally or may not rally far. However,
if the USD rebounds visibly, gold is likely to be affected negatively to
a great extent.

Can the USD Index rally shortly? Naturally - it moved back to the December
2015 high (even a bit below it) and is now back at 100.67 at the moment
of writing these words (gold is at $1,212), so it appears that the move
above the December 2015 high is verified. Plus, the turning point suggests
that a reversal is upon us and the most recent move was definitely down
- the implications are bullish.

Why did the USD Index plunge so significantly yesterday? Trump
said that the USD was too strong. Did this materially change anything?
No - that's an opinion of an important person, but that doesn't change
the fact that the interest rates in the U.S. are most likely going higher
and the rates in the EU and other parts of the world are unlikely to
move higher (the opposite appears more likely). Consequently, the USD
Index should not be impaired in the coming months and yesterday's reaction
is likely emotional and temporary.

The USD Index erased the entire decline that we saw this week (being up 0.04
this week based on yesterday's closing price) as it bounced off the rising
red support line and - approximately - the December 2015 highs. The breakout
above the latter seems to have been verified. The implications are bullish.

Our yesterday's comments remain up-to-date:

Silver rallied right at its turning point and it outperformed gold on
a very short-term basis, which is a very bearish combination. As soon as
silver declines a little (and it's likely to), a sell signal from the Stochastic
indicator based on the SLV ETF will also emerge, further confirming the
bearish case. It appears that we are on the verge of another significant
decline in the white metal.

Silver outperformed once again by moving to new intra-day highs before turning
south - gold didn't move above Tuesday's highs. Since the above is very often
seen at local tops and right before big declines, it should not be ignored,
especially that we just saw a repeat of the signal, which made it even more
prominent.

Gold moved to $1,219 today, so the 50% Fibonacci retracement was reached
and that was almost the case with the declining red resistance line. In
light of the turning points and support being reached in the USD Index,
it seems likely that today's session is the final reversal (or extremely
close to it) - perhaps today's session or the following one will be just
like the session after the U.S. Presidential elections - with gold sliding
quickly right after the uncertainty had peaked.

Gold didn't slide as much as previously, but still, it stopped the rally
after moving to the 50% Fibonacci retracement and the declining resistance
line. Gold also closed below the March / May 2016 lows in terms of daily
closing prices. Without a breakout, the move higher is likely just a verification
of the breakdown.

The above remains up-to-date. Gold closed the day at $1,204 (even though the
Stockcharts.com's data seems to suggest otherwise) so we saw a quite profound
daily reversal and a close back below the 38.2% Fibonacci retracement (based
on daily closing prices). The implications are bearish.

Before moving to mining stocks, we would like to discuss the issue of the
50-day moving average and gold's recent breakout above it. It has been
described as something that is likely to make gold's rally sustainable, or
at least make it bigger than it currently is.

The above chart includes black arrows and red arrows. All arrows mark situations
in which gold broke visibly (we didn't count temporary moves a little above
/ below it that appeared accidental) above the 50-day moving average. Black
arrows represent situations in which the breakout was followed by a very short-term
rally (usually very similar to the one that we saw this month) that turned
out to be excellent shorting opportunities. The red arrows represent situations
in which the small post-breakout rallies were followed by much bigger rallies
(and thus the breakout was indeed a bullish signal). Out of 16 cases that we
can see above, there were 12 cases that were shorting opportunities and 4 cases
that were buying opportunities.

The question is: should one trust the bullish analogies that had a 25%
(4 out of 16) efficiency or the bearish analogies that had a 75% (12 out
of 16) efficiency? We think the latter is much more justified, but at
the same time we would like to stress that it is not a major reason due to
which we think that precious metals are heading lower - it's a supplementary
reason that is only moderately useful. Why? Because in the most recent past
the efficiency of the bearish signals would be 3 out of 5, which is close
to 50% - so it doesn't seem to be a particularly reliable factor. Still,
if we had to pick if its more bullish or bearish, we would go with the latter
interpretation.

As far as mining stocks are concerned, we previously wrote the following:

Since gold moved higher, gold miners are also likely to move a little
higher, but the 38.2% Fibonacci retracement will likely keep the rally
in check. Miners have been underperforming gold for several days (bearish
implications) and the implications are bearish.

(...) gold miners moved very close to the 38.2% Fibonacci
retracement, but there was no move back above it - the rally that
we saw recently appears to be nothing more than a correction after a
big decline.

Gold stocks haven't plunged violently yet, but they did close back below the
January 5 high even though gold didn't. Overall, the miners' underperformance
continues and it has bearish implications for the precious metals sector.

Summing up, the bearish medium-term outlook remains in place and based
on silver's short-term outperformance, reversals in it and in the USD Index
along with other factors, it appears that the short-term outlook has deteriorated
once again. You will find detailed implications of the above situation on our
trading positions in our Gold & Silver Trading Alerts.

Thank you.

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Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who
takes advantage of the emotionality on the markets, and invites you to do
the same.

His company, Sunshine Profits, publishes analytical software that anyone can
use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem
that may never be solved, PR has changed the world of trading and investing
by enabling individuals to get easy access to the level of analysis that
was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are
results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals
sector. For that reason it is his main point of interest to help you make
the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for
professional excellence and ethics for the ultimate benefit of society.

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